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Official position of Ukrtransgaz JSC regarding the events involving the implementation of the new code of Ukraine's gas transmission system

Recently, misrepresentation of information on the position of JSC “Ukrtransgaz” regarding the introduction of the new GTS Code and, in particular, the transition to the daily balancing regime of the gas transmission system (hereinafter - GTS) takes place in the public space in every way.


In reality, JSC “Ukrtransgaz” is strongly required to introduce the automatic operation of the existing scheme of appropriation by unscrupulous users of the gas transmission system of a valuable asset – the service natural gas, which is necessary for the uninterrupted and reliable functioning of the Ukrainian GTS.


JSC “Ukrtransgaz”, like no other, is interested in effective regulation of access to the GTS, in particular, to such valuable asset as service natural gas.


At the same time, JSC "Ukrtransgaz" has repeatedly stated that reliable and uninterrupted work of the GTS in the conditions of daily balancing will have a positive impact for all bona fide users.


However, today, companies that have been blocking reforms for many years and are generally not interested in conducting their business continue to operate on this market. Every day Ukrtransgaz feels this struggle of unscrupulous market participants against the introduction of positive European experience, with openness and transparency in the market. Such a struggle is carried out both externally and internally.


Reforms in the gas marketan outward glance


The process of reforming has been taking place in Ukraine for the last few years. However, not all reforms lead to a change in the existing order. There are ones target not a qualitative changes and the transition to a transparent, open and competitive environment, but makes only imitation of changes.


The reform of the natural gas market is regulated by its Regulator - NEURC. The top priority now is the introduction of daily balancing, that is aim to inform customers about the size of their positive or negative imbalance.


This will allow the customers of transmission services to promptly sell the remaining natural gas or buy shortage of natural gas that is not sufficient. The GTS operator, in case of refusal to cover a daily imbalance by its customer, would be able to stop the gas transportation to its directly connected consumers immediately. In case the gas consumed by the customers of gas distribution network operators, the GTS Operator can address the demand to stop the gas consumption to the gas distribution network operators. In turn, the reliability of the functioning of the GTS is a guarantee of national security in general.


An important part of this reform consists in the prevention of losses of the gas transport operator - the company shall be able to ensure uninterrupted and reliable operation of the Ukrainian GTS. Awareness of these preconditions and their consequences requires a responsible attitude to change the legal, technical and economic principles of functioning of this system.


Adoption of the New Wording of the GTS Code – «Cooperation» with the Regulator


The latest changes to the GTS Code, Resolution adopted by the Regulator in December 2017 and coming into force on August 1, 2018, were not an exception. Such changes have once again proved that the transition to a transparent, open and competitive environment will not happen this time either.


During the last two years, there have been a lot of such changes, and unfortunately, their number does not indicate the quality of the reform. This is probably because the Regulator (NEURC) ignored the position of JSC “Ukrtransgaz” as an operator of the gas transmission system every time it made a decision to make changes. This is true even when the requirements of the Law of Ukraine "On the Natural Gas Market" impose on the Regulator the duty to interact directly with the GTS Operator.


Unlike previous changes, which have not improved the situation in the market, the latter – have significantly aggravated the situation, creating favourable conditions for even greater abuses and offenses.


Thus, in fact, the new requirements of the GTS Code make it impossible to determine the amount of financial provision necessary to cover the losses that can be inflicted on the GTS operator by the customers of transmission services.


The newly revised GTS Code continues to maintain the legalization of natural gas stolen because it defines "unauthorized gas extraction", that is, theft of gas as "services" provided by JSC “Ukrtransgaz”. In accordance with Section 1, Chapter 1, paragraph 5, subparagraph 55 of the Gas Transmission System Code in the new wording: "Unauthorized natural gas withdrawal is the withdrawal of a natural gas in the absence of a consumer in the Supplier’s Consumer Register System of any supplier during the settlement period; without signing a relevant contract with the supplier; by unauthorized connection and / or with the use of intentionally damaged natural gas measuring  devices or beyond the scope of measuring devices; through the unauthorized renewal of natural gas consumption".


That is, anyone can illegally deprive Ukrtransgaz of ownership of the service resource of natural gas and this will not be considered an offense because according to Section XII, Chapter 6, paragraph 7, subparagraph 2 of the new edition of the GTS Code this is a balancing service.


It should be noted that in recent years, private companies or gas distribution network operators - have started to use this balancing service very often and to a large extent. They will not pay for such service in the near future, because they are waiting for benefits and grants from the state budget of Ukraine.


And finally, the fact that the new version of the GTS Code effectively excludes all possibilities for the functioning of the free capacity market at internal points of exit from the GTS, giving operators of gas distribution networks the exclusive right to purchase such capacities and removing other participants of the natural gas market.


Thus, according to Section IX, Chapter 1, paragraph 3 of the GTS Code in the current wording, the capacity of the physical point of exit from the gas transmission system to which the gas distribution system is connected shall be provided exclusively to the gas distribution system operator for a period not less than one year.


During the last 9 months, Ukrtransgaz has sent 10 letters to the NEURC with comments that the new version of the Code is inadequate, does not conform to European practices and was adopted in violation of the procedure for the development and approval of amendments, including violation of the requirements of the Law of Ukraine "On the Natural Gas Market". However, there is no meaningful dialogue with the Regulator.


At the same time, based on the results of consideration of the appeal of JSC "Ukrtransgaz" regarding the postponement of the deadlines for entry into force of the GTS Code in its new wording, the Regulator officially reports on its web site: "Taking into account that JSC “Ukrtransgaz” deliberately impedes the process of introduction of daily balancing in the natural gas market of Ukraine, the Regulator considers it inexpedient to postpone the deadlines for the entry into force of the NEURC Resolution of 27.12.2017 № 1437 and stresses that from 01.08.2018 the natural gas market of Ukraine will be transferred to daily balancing".


Daily Balancing Software Development by IP Systems


Recently the company has replaced its top management that allowed to expose yet another large-scale fraud in early 2018. The main purpose of that fraud action was to create a simulation of market reform and transition to daily balancing. In fact, to legalize the existing scheme of appropriation of a process natural gas of JSC “Ukrtransgaz". As you know, process gas in the gas transmission system ensures its uninterrupted and reliable operation.


The timeline of the events is as follows: in 2016, in order to fulfil the task of the Regulator of the introduction of daily balancing, JSC “Ukrtransgaz” began the procedure for public procurement of services for the implementation of the information platform under the existing rules of daily balancing. A Hungarian company IP Systems became the winner and the relevant contract was signed with it.


However, only a few weeks after the contract was signed, the Regulator adopted a new regulation, which introduced a fundamentally different model of daily balancing regime. IP Systems was not prepared to bear any additional costs to increase the scope of the implementation work, although such a duty was directly stated in the contract.


In December 2017, IP Systems reported on the availability of an information platform for the full operational work. Simultaneously, in December 2017, the Regulator adopted a new edition of the Gas Transport System Code, which again introduced a different approach and new requirements for the key tasks and functions of JSC “Ukrtransgaz”.


For its part, IP Systems confidently declared the availability of the information platform in accordance with the requirements of the first edition of the GTS Code.


In early 2018, before launching the information platform for industrial operation, the new management of JSC “Ukrtransgaz” expressed reasonable doubts about the possibility of functioning of such a platform. In this regard, JSC "Ukrtransgaz" ordered an IT audit of the information platform at Ernst & Young.


In March-April 2018, Ernst & Young provided consulting services to verify the implementation of the software package "Information Platform of JSC “Ukrtransgaz”. The results of services were submitted to the Board of JSC “Ukrtransgaz” and confirmed the total unavailability of the information platform to ensure the daily balancing of the gas transmission system.


Thus, in the report of Ernst & Young, it is stated "putting the software complex into operation at the end of the inspection is impossible. In our opinion, the software complex is not ready for switching to operational work within the framework of the Code of the gas transmission system, approved by Resolution of NEURC No. 2493 of 09.30.2015".


However, at the recent meeting, the Regulator invited IP Systems as a software developer of the "Information platform of the operator of gas transmission system and underground gas storages" for JSC "Ukrtransgaz". At the meeting, all natural gas market participants, mainly representatives of the same private companies - gas distribution network operators, announced the beginning of successful testing of individual modules of "Informational platform of the operator of gas transmission system and underground gas storages" for JSC "Ukrtransgaz".


It should be noted separately that the contract with IP Systems provided for the implementation of the information platform on the basis of the previous edition of the gas transmission system Code (valid until 01/01/2018).


By results of Ernst & Young audit, the management of JSC “Ukrtransgaz” immediately decided to conduct an internal investigation. The investigation has revealed the facts of signing by the responsible employees of JSC "Ukrtransgaz" of Certificates of Work Performed, which has not been actually performed. At the same time, payment under the signed Certificates has been made in full. According to the results of the official investigation, disciplinary measures were taken against the responsible employees of the company. Based on the official investigation of JSC “Ukrtransgaz”, NJSC "Naftogaz of Ukraine" conducted a comprehensive inspection and established a number of gross violations of both internal documents of the company and current procurement law, in particular, the procurement of IP Systems services, which was started back in 2016. According to the facts, NJSC "Naftogaz of Ukraine" sent an appeal to law enforcement agencies and, accordingly, a pre-trial investigation was initiated within the framework of criminal proceedings, according to which JSC "Ukrtransgaz" was recognized as victim.


The Regulator, however, continues to insist on the involvement of IP Systems and ignores all appeals and statements from JSC “Ukrtransgaz” that the new rules substantially impair the existing situation with the extraction of the process gas and restrict the right of the GTS Operator to determine independently the amount of financial provision for covering the losses caused by unscrupulous participants in the natural gas market.


And as already mentioned earlier, for the effective transition to the daily balancing of the gas transmission system, significant changes shall be made to the requirements of the GTS Code, which will ensure a reduction of unauthorized gas extraction, sufficient level of financial provision of obligations, unconditional and mandatory disconnection of offenders in the natural gas market.


Taking into account the non-constructive position of the NEURC, Ukrtransgaz appealed to the Energy Community in a dispute with the Regulator regarding bringing the Code of the gas transportation system in line with the rules of the European energy legislation. The Energy Community has accepted the appeal of the company and on June 27 appointed the presiding judge in the dispute.


In addition, JSC “Ukrtransgaz”, considering the actions of the Regulator regarding the adoption of amendments to the Code of the gas transmission system unlawful, filed a lawsuit on June 25, 2018, to the District Administrative Court of Kyiv seeking an invalidation of the NEURC Resolution "On Approval of Amendments to Some NEURC Resolutions Regarding the Implementation of the Daily Balancing in the Natural Gas Market and Procedures for the Development, Submission and Approval of the Gas Transmission System Development Plan for the next 10 years" of December 27, 2017.


Ukrtransgaz continues to work upon the early implementation of the GTS daily balancing system


Today Ukrtransgaz, despite the obstacles, continues to work upon the early implementation of the daily balancing system of daily of the gas transmission system, namely:


1. A series of meetings with GTS operators in European countries was held to study their experience in implementation of daily balancing platforms, including Enagas (Spain), Ontras (Germany), NET4GAS (Czech Republic), and Gaz System (Poland).


2. Documentation on the procurement of services for the implementation of the information platform is being prepared.


3. At the same time, the work is under way to optimize the use of existing systems and platforms of the company to ensure daily balancing.


The position of JSC "Ukrtransgaz" remains unchanged - the implementation of the system should be in line with the best practices, requirements of European energy legislation. JSC "Ukrtransgaz" will make every effort to ensure timely provision of daily balancing of the gas transmission system.